A better deal for capital gains
Capital gains tax (CGT) has a long and complex history. Introduced by James Callaghan in 1965 (then Chancellor), it has since used a variety of structures. At its most basic, it levies a tax on the net sale price of an asset after deducting the base cost, i.e. the cost of acquiring, defending and improving the asset.
For many years the tax was levied at 30 per cent, but by the early 1980s inflation had become a real problem. Recognising that CGT was taxing inflationary as well as real gains, Geoffrey Howe introduced indexation. This allowed people to strip out the effect of inflation when calculating CGT liability.
In 1998 the structure was revised by Gordon Brown, with an end to further indexation and the introduction of taper relief. The longer you held an asset, the lower the rate of tax. This saw particularly advantageous rates for business assets, on which the rate could fall to 10 per cent after just two years of ownership. Then in 2008 it all changed again: the Finance Act 2008 swept away taper relief and introduced a flat CGT rate of 18 per cent.
The loss of taper relief became contentious over the winter of 2007/08, with serial entrepreneurs leading a chorus of complaint. The Treasury responded with entrepreneurs’ relief, giving an effective 10 per cent tax on the first GBP1 million of qualifying gains in an individual’s lifetime. The scale of the relief has since grown to GBP10 million.
Access to entrepreneurs’ relief requires a ‘qualifying business disposal’ (s169H(1) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992)), generally the disposal either of all or part of a business, or of certain business assets. The law provides three types of qualifying business disposal, depending on whether the disposal is of an asset, a share or a business. The first type is a material disposal, which includes the disposal of all or part of a business, disposal of shares in a business, or disposal of assets used in a business once that business has ceased. The second type is the associated disposal of an asset, and the third is a category for certain trusts.
Disposal of trust business assets
There are specific rules for trusts and their beneficiaries. While trustees cannot claim entrepreneurs’ relief in their own right, they can in effect claim in lieu of the beneficiary, with the tests turning largely on the beneficiary’s circumstances. A qualifying beneficiary is one who has an interest in possession (otherwise than for a fixed term) in either the whole of the settled property or at least a part of it that consists of or includes the settlement business assets disposed of (s169J(3) TCGA 1992). When these provisions were scrutinised at committee stage, the standing committee noted that a defeasible interest in possession is not necessarily an interest for a fixed term (Official Report, Standing Committee A, 8 May 2008, col 142).
In this context, settlement business assets (s169K(2) TCGA 1992) are defined as follows:
(i) Assets consisting of (or of interests in) shares in or securities of a company, where that company must for at least one year in the three years preceding disposal have been:
(ii) Assets (or interests in assets) that are part of the settled property which are used or were previously used for the purposes of a business provided that:
Although the provisions of entrepreneurs’ relief are more restrictive for trusts than for other ownership structures, these final rules on timing in s169J(4) TCGA 1992 are more generous. It also appears that beneficiaries using trust property in their business are not subject to the same restrictions on associated disposals as private individuals. However, trustees should note the overriding restriction set out in s169L TCGA 1992 on assets held for investment where they receive rents for land let to a qualifying beneficiary.
Entrepreneurs’ relief is an extremely valuable relief from CGT, but it is subject to important qualifications and the law leaves many questions for interpretation. With the scale of tax at stake, planning and careful analysis involving all the client’s advisors – solicitors, accountants and valuers – is exceptionally important.
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